How to Determine the Fair Salary for an Employee: A List of Criteria

Introduction (or, the reason I wrote this)

There’s a moral problem that many companies face sooner or later, which is also a constant source of tension between the levels of an organization. That problem can be stated as follows:

• How do we pay employees fairly and reduce the discrepancy between a “fair” and “deserved” pay, and the amount that an employee actually receives?

In this article, I am going to broadly generalize and say that I think that this problem cannot be solved without answering the following question: What is the minimum set of clearly articulated criteria that should influence the compensation of any employee on any position within any organization?

Answering this question can help understand the qualities that an employee exhibits at work, and compare them against the qualities that the company requires an employee to have, to confer as much benefit to the company as possible. This article is an attempt to identify key criteria and to work toward systematizing the process.

Let’s briefly acknowledge that, in many organizations, the policies are aimed at reducing employee pay as much as possible while maximizing employer benefit as much as possible. Actual fairness does not seem to enter into the equation in those organizations. I’m not here to condemn or justify this approach. I just want to share my vision and show what fair compensation could look like in a company using rational reasoning.

This is not an easy task. Some companies build intricate performance metrics, others decide to make all salaries public, some even have a system in which employees collectively decide the salaries their colleague will be paid. There are also companies that pay their employees with shares of stock, directly tying the amount that the employee receives to the success of the company, thus increasing employee motivation to perform.

How to assess fair compensation

Many compensation approaches focus on assessing an employee’s performance while completely disregarding other aspects. These aspects, however, always emerge during the employee’s annual performance review, leaving the reviewer with few arguments as to why the employee’s salary can’t be raised to the level previously agreed upon.

But how do you measure performance? Some professions within IT are quite easy to assess. In sales, for example, salary can be calculated based on the amount of the contract(s) signed, but I question even this approach at times. And other professions are not as easy to quantify in terms of employee performance. You cannot assess how much work a programmer has done based on the number of lines of code they generated, since this is obviously unfair. Similarly, you cannot assess employee performance using the number and complexity of the logical nodes created/updated efficiently by an employee, since no one has created a way to evaluate this yet (although there have been many attempts).

A comparison I find interesting to consider is one between a programmer and the author of a book. Generally, authors are not paid based on the number of words used in a book; otherwise, you would find books packed with useless unreadable metaphors written by authors striving for better pay. Authors are instead compensated based on the popularity of the book: in theory, the better the book is, the more popular it is (I acknowledge that this argument requires us to ignore the impact of factors like marketing). Can we imagine paying programmers according to the popularity of the software they’ve written? Companies have been paying programmers with stock options, but the amount of those shares doesn’t really correlate with their contribution.

Some companies try to solve the underlying problem by creating a personal growth plan for every employee, setting specific goals for self-educating, and then raising the salary or changing the compensation structure for an employee depending on whether or not they reached a specified threshold by acquiring a certain certificate, learning a new programming language, etc.

7 parameters of well-grounded compensation

At this point, I should make clear what I mean by “fairness.” Perfectly fair compensation has never existed and probably never will. It consists, however, of a direct correlation between salary and the benefit that an employee brings to the company. The benefit consists of both tangible (e.g., working code, goods produced, balance sheet kept in order) and intangible (e.g., ways of working, reputation, strategy, brand recognition, atmosphere in the company) components, and focuses on both the short and long term.

I believe that a fair compensation should be based on at least 7 components, listed in no particular order below:

• Impact,
• Skills,
• Goals,
• Responsibility,
• Culture fit,
• Loyalty,
• Job market situation,
• A bonus parameter.

I wanted to add “position fit” to the list since, clearly, if a Lead Solution Architect does nothing more than manual testing, they shouldn’t be paid as a Lead Solution Architect. But I think this is covered by 2 other parameters — impact and responsibility.

In the interest of clarity, let’s address each parameter separately.

1. Impact

Or how effective and efficient your labor actually is.

To me this is by far the most important component. Fair compensation should be based on the actual amount of benefit that an employee provides. Of course, it’s rarely possible to quickly achieve something tangible while you are still on probation, and this is one of the reasons why I include other components in addition to this one. But if we want the employee’s labor to be useful, we must take into account the direct impact flowing from an employee’s primary set of responsibilities. By primary set of responsibilities, I mean the job description given to an employee when they were hired to do the job.

While assessing impact, the following should be also kept in mind:

• Impact can be negative: bugs, server downtime, broken keyboards – these should also be considered.

• There are roles whose impact is present but not visible, perhaps because it is spread out in time and in space, in other words it is more evolutionary than revolutionary. In this case, the impact may be hard to see and hard to describe, but it can still be quite profound.

• An employee may not be provided with enough tasks by the company to actually have a measurable impact.

2. Skills

Or how much you’re able, or potentially able, to do.

Skills and potential are in the same category because both focus not on a benefit that an employee has actually brought to the company, but their potential impact. This is what many companies actually focus on when assessing the salary of an employee, many times to the company’s detriment. Focusing on skills is not always a bad thing, but it is not the only thing that matters when evaluating an employee’s fair compensation. This parameter may include things such as:

• How much knowledge you possess on the actual subject matter of your job.

• How much you can potentially contribute.

• How fast you are progressing on your personal development plan.

• How much you have progressed since your last review.

3. Goals

Or whether you achieve the goals management set for you.

This one is fairly straightforward. If you agreed to achieve a specific goal in your previous review, then to increase your salary you must have achieved it. Let’s say your startup currently lacks CI/CD for smooth feature delivery and your goal is introduction of the practice in your team by a certain date. It may not necessarily be a part of the product backlog at the very moment, but if you’ve achieved the goal, well done, you can ask to have your paycheck increased.

4. Level of responsibility successfully executed

Or how much is at stake with decisions that you make.

It is common knowledge that people with more responsibility can make a bigger impact simply by virtue of having access to a greater variety of bigger tasks that change more within the company. This also incorporates the fact that the more responsibility you have, the more risk you bear. How successfully you handle this is one of the points included in the level of responsibility.

Let’s consider a simple example: a head of a development department will most probably have a different compensation than a junior developer. This is so not only because of the skills and impact associated with the positions, but also because the lead’s tasks bear more risk and offer more potential reward to the company. Employees who undertake tasks that bear bigger risks, and handle them well, should be paid more, since they bring more benefit to the company while protecting it from risks.

5. Culture fit

Or whether you are the right Lego piece.

A company is made up of people, sometimes lots of teams of people. Companies also should (but do not always) have clear values, principles, traditions, ways of working, modes of behavior, and other factors which – taken together – constitute a company culture. The “culture fit” factor should assess how well you fit in this company, and whether you are rowing in the same direction as others who work there or not.

If you don’t fit well in the team, people may tolerate you because of the impact that you make. But this may cause their productivity to decrease, so this factor must also influence compensation.

6. Loyalty

Or how much you are sincerely trying.

Overall, by loyalty, I mean:

• Does this person champion the company’s values within and outside the company?

• How likely is the person to change jobs?

• How long has this person worked in the company?

• How motivated is this person to work?

Definitions of loyalty may vary, so feel free to adjust this one to suit your needs, but please be aware of the culture fit when considering this parameter.

I must admit that this parameter is less rational than the others. I’ve included it because it has been established as a tradition in many teams that the longer you work for a company, the higher your compensation. There is some rational component to this parameter, though. If an employee with a high level of responsibility decides to leave, this causes disruptions to the team, its processes, morale, etc. This has a direct impact on the company’s performance. Thus, I accept that loyalty must be rewarded.

7. Job market situation

Or how much demand is there in the market for people like you.

This parameter is also fairly straightforward. If other employers pay $2000/month to do your job, there’s no reason to pay more. Ultimately, the existence of every business depends on how profitable they are. A business is not likely to pay you more while they can find the same person for less.

8. Bonus parameter — perception of your own company

Or whether or not an employee likes working with your company more than with others.

The way an employee perceives a company is quite random. There are, however, some things that you as a manager can do to improve your odds of a positive perception:

• Ask about employees’ expectations regarding their position/team/company.

• Make a visible effort to meet these expectations.

• Make reasonable promises.

• Fulfil those promises.

• Be candid.

Many companies and many managers often struggle to adopt at least 3 of these items. If you succeed in doing that or more, you should already be proud of yourself.

Perfectly fair compensation may not exist anywhere, but implementing these parameters and certain tools can help move your company in the right direction.